The Omen

How an obscure Breton trader gamed oversight weaknesses in the banking system.

Jérôme Kerviel arriving at a hearing in Paris inJuly: “I told myself that Société Générale would never fire someone who was generating this much cash.” Photograph by Thomas Coex.Credit Afp/Getty

On Monday, January 21, 2008, concerns about deteriorating economic conditions in the United States caused a precipitous fall in the Asian markets. Investors in Hong Kong and Tokyo besieged brokerage firms. Markets in the United States happened to be closed, for the Martin Luther King, Jr., holiday, but U.S. stock-futures trading in foreign markets showed a sharp decline. In the press, the day was dubbed “Black Monday.” Fears of a worldwide financial collapse were so intense that the U.S. Federal Reserve held an extraordinary emergency meeting. Before trading began in New York that Tuesday, the Fed announced a three-quarter-point cut in the federal funds rate, the largest in more than two decades. The news initially caused U.S. markets to drop, but they soon stabilized.

Two days later, representatives of Société Générale, whose innovative and sophisticated trading operations had made it one of the world’s most admired financial institutions, asked that trading in its stock be halted. The bank had discovered that one of its traders had taken “massive fraudulent directional positions in 2007 and 2008,” and that he had concealed them “through a scheme of elaborate fictitious transactions.” The bank incurred a net loss of 4.9 billion euros—said to be the largest trading fraud in banking history.

The trader, a thirty-one-year-old Breton named Jérôme Kerviel, became an instant and notorious celebrity. Because so little was known about him, speculation abounded: that he might be at risk of suicide; that he had abandoned his apartment in Neuilly-sur-Seine, an affluent Paris suburb close to Société Générale’s headquarters, and might have fled; that the police had discovered a Koran in his apartment, which suggested possible terrorist links.

Most baffling was the question of motive. There was no evidence that Kerviel had stolen anything, and he had none of the trappings of wealth. When the police went to his home, they found a sparsely furnished one-bedroom apartment; he didn’t own a country house, or even a car. In interviews with the French police and a court-appointed psychologist, Kerviel claimed that his primary concern was to benefit the bank.

Société Générale’s top officers and directors and their colleagues in the French business establishment considered Kerviel’s activities an isolated case of fraud, according to an internal report. Jérôme Kerviel was a flambeur (“high roller”), a joueur (“gambler”). His ambition, greed, and, perhaps, even madness threatened not merely an august national institution but the entire international financial system. Moreover, as commentators in the press pointed out, the culprit was a graduate of a trade school rather than of a grande école. He had entered the bank through a side door—the “middle office”—and advanced beyond his station, affirming the practical wisdom of France’s rigid educational system and its distrust of the dangerously romantic notion that anyone can reach the top.

But many French citizens saw the situation differently: Kerviel was the victim of a profit-obsessed bank, which largely existed to extract revenue from the struggling working and middle classes while enriching its top officers and shareholders. Surely Jérôme Kerviel, the naïve provincial, who was good-natured, hardworking, and handsome (his colleagues noted his resemblance to Tom Cruise), was manipulated and encouraged by his su-periors. How could one person have amassed an exposure, as Kerviel had, of fifty billion euros without his superiors at the bank knowing? After his photograph appeared in the press, strangers approached him on the street and in cafés, seeking autographs and offering encouragement. In a poll commissioned by Le Figaro a week after the bank’s announcement of the loss, just thirteen per cent of the respondents blamed Kerviel for the scandal; fifty per cent blamed Société Générale.

Now that the financial world is enduring its most serious turmoil since the Great Depression, and public outrage is focussed on financial chief executives and their multimillion-dollar incomes, Kerviel looks even less like an isolated rogue trader, and more like a harbinger of systemic failure: the intricate investing vehicles that few understood; the impotence of internal risk controls; the moral blindness in the face of mounting profits; and, above all, greed. The F.B.I. says that it is investigating twenty-six financial insti-tutions in the U.S.—they reportedly include Lehman Brothers, Fannie Mae, Freddie Mac, and A.I.G. Jérôme Kerviel may be only the first of many traders to face the prospect of years in prison.

Pont-l’Abbé, Jérôme Kerviel’s na-tive village, is in Brittany, near the westernmost point in France. It’s a small settlement on an estuary off the Atlantic, where sailing boats dock just steps from a medieval castle and an ancient bridge. Signs appear in both French and Breton, a Celtic language with characteristic hard-“k” sounds, as in the name Kerviel. Jérôme and his older brother, Olivier, who also went into finance, grew up in a cottage on the outskirts of the village. Their father was a blacksmith who taught at a technical school in the nearby city of Quimper. He built a small foundry on one side of their house; a rose garden and neat hedges divide the front garden from the foundry’s parking lot. Their mother owned a hair salon, and tended the garden.

Jérôme’s mother and older relatives doted on him. He was well behaved at school, and as a teen-ager he often helped his mother at the salon. He loved sailing on the estuary and excelled at judo, which he taught to younger students. In the evening, the Kerviels debated current events and business at the dinner table, but the brothers attribute their interest in markets and finance to a teacher at the lycée who schooled them in the basics of economics and stock markets. Perhaps the most electrifying influence was the 1987 movie “Wall Street,” which starred Michael Douglas as an Ivan Boesky-type arbitrageur and inside trader. The brothers weren’t attracted as much by the central character, who is, after all, a criminal, as by the excitement of the trading floor.

France’s free public-education system embodies national ideas about égalité and meritocracy. After the lycée, students who continue their education are generally steered into one of three tracks: a public university, a private highereducation school (sometimes inferior to the public universities), or a classe préparatoire, or prépa, an intense public school that prepares students for the entrance exams, or concours, which are a basis of admission to a grande école. The grandes écoles are considered the most exalted track. Whatever one’s subsequent achievements, the first reference in any biography or résumé in France tends to be the name of a grande école.

After graduating from the lycée, Kerviel took the concours for the Sciences Po Lille, which specializes in European and international studies. When he failed to get in, he studied economics for a year at a university in Quim-per, finishing first in his class. Seeking something more practical, he transferred to the Institut Universitaire Professionalisé, a kind of trade school, in Nantes, the largest city in western France. During his final year, he worked as an intern at the local headquarters of Société Générale, where a manager, impressed by his drive and his polite demeanor, encouraged him to continue his studies and to apply for a full-time position. Kerviel chose a program at the University of Lyon which focussed on oversight of investment banking. The course was taught by bankers rather than by academics and included an internship requirement, which Kerviel fulfilled in Paris at BNP Paribas. He earned his degree and accepted an offer from Société Générale.

Founded in 1864 by order of Napoleon III, Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France—or SocGen, as it is known—was conceived by French bankers and railroad executives as a counterweight to Crédit Mobilier, which was owned and run by the Pereire brothers, members of a prominent family of Sephardic Jews; Empress Eugénie helped choose the bank’s unwieldy but high-minded name. Along with other major French banks, SocGen was nationalized after the Second World War, remaining in government hands until 1987, when it was privatized and shares were offered to the public.

SocGen plodded along in the ranks of large, marginally profitable, and stodgy banks like Crédit Lyonnais and Crédit Agricole until 1997, when Daniel Bouton was named chairman and chief executive. Bouton, now fifty-eight, is of medium height and balding, with intense blue eyes behind rimless glasses. Golf and opera are among his passions; he is said to have an encyclopedic knowledge of Burgundy and owns a highly regarded cellar of grands crus. He is a member of what may be France’s most exclusive group, the secretive Club des Cents, which meets weekly to savor haute cuisine and fine wines. Though not from a wealthy family, Bouton went to the best schools and has had powerful mentors. He was born in Paris in 1950; his grandfather was a gatekeeper, and his father died when Bouton was thirteen. At the age of seventeen, he achieved the highest score on the Concours Général d’Histoire and entered the prestigious Sciences Po, in Paris. He went on to the École Nationale d’Administration, the traditional training ground for the nation’s élite, and then joined the government of President Valéry Giscard d’Estaing. When he was twenty-three, he was appointed inspecteur des finances, and in 1988 was named directeur du budget, a position he retained until 1991, when he left the government to join SocGen.

Besides extending the bank’s presence in Eastern Europe and Russia (SocGen bought a stake in Russia’s RosBank in 2006), Bouton built SocGen’s investment bank into a pioneering and profitable global competitor by recruiting heavily from France’s École Polytechnique and introducing advanced engineering and math concepts, such as complex derivative-trading strategies. By 2000, SocGen had become a world leader in equity derivatives. Under Bouton’s direction, the firm has grown to a hundred and fifty-one thousand employees, working in eighty-two countries; the corporate and investment banking division alone has twelve thousand employees, in forty-five countries. In July, 2006, Euromoney named SocGen the world’s best bank.

Jérôme Kerviel arrived at Société Générale’s sleek twin skyscrapers in Paris’s La Défense district in August, 2000. He worked in the middle office, where he helped to administer the bank’s database and, later, to implement computerized trading systems. In 2002, Kerviel accepted a transfer to the trading floor as an assistant trader, largely because the job offered the chance to build on his work with spreadsheets, a skill he had thought would prove use-ful. His former co-workers voted him Trader le plus sympa.

Unlike the middle office, the trading floor was frenzied. From his desk, Kerviel could easily listen to the conversations and phone calls of traders, and he was exposed to a dizzying array of derivative products. Most simply, a derivative is a contract whose value is determined by the value of another asset, and it allows investors to make significant gains or losses based on relatively small changes in the market. The most common derivatives are stock options, which are the rights to buy or sell a stock at a fixed price within a certain period of time. Their value depends on the price of the underlying stock. While derivatives can be an effective hedging tool for conservative investors, they also offer vast opportunities for highly leveraged speculations.

As an assistant trader, Kerviel worked for a succession of more senior traders, maintaining records and answering phones. He showed an unexpected aptitude for arcane derivative strategies and developed an avid interest in trading. “He was somebody who was experienced, with technical ability,” a supervisor later recalled to a French journalist. “Helpful. He was seen as having good potential. He had new ideas.”

By early 2005, Kerviel was working on the Delta One desk. (“Delta” refers to the rate of change in the value of a derivative compared with that of the underlying asset. In trading lingo, “Delta One” refers to a perfectly hedged position, in which any profits or losses are exactly offset—if a derivative loses a dollar, the corresponding investment will gain a dollar.) Kerviel became a specialist in a complex type of derivative product known as a “turbo warrant.”

Soon Kerviel was earning a salary of forty-eight thousand euros, and he felt pressure to prove himself to his colleagues and superiors. “I had realized during my first meeting, in 2005, that I was not as well regarded as the others, owing to my education and my personal and professional background,” he later explained to the police. (The police report is contained in the book “Cinq Milliards en Fumée.”) “Because, you see, I didn’t go straight to the front lines—I went through the middle of- fice, and was the only one who did.”

Kerviel observed that it was possible to carry out unauthorized trading on the Delta One desk. If the trade was “intra-day” (that is, exited within a single day), it wouldn’t show up as an open position on the bank’s daily account reconciliations. He began taking his own intra-day positions.

In July, 2005, Kerviel sold short some ten million euros’ worth of shares of Allianz, the European insurance giant. As in all short sales, he borrowed the shares and sold them immediately, hoping the price would subsequently fall. Then he could buy the shares at a lower price and return them to the lender, keeping the profit. Of course, if the shares rose in price, he would have to buy them back at a higher price and lose money. “It just so happened that a short time thereafter the market fell after the London bombings”—of July 7th—“and it’s the jackpot: five hundred thousand euros,” he later said to the police. “I got the idea of a deal to cover my position. I had mixed feelings, because I’m proud of the results and surprised at the same time. It makes you want to continue; there’s a snowball effect.” Well versed in the accounting system from his time in the middle office, Kerviel learned to enter a false offsetting trade to divert attention from the unauthorized overnight position. “I made the decision very quickly, instinctively,” he said. It was his first hidden position.

Kerviel says that he told his supervisors about the Allianz profits. “Their first reaction was satisfaction, naturally, although they told me . . . to avoid such positions, because I could just as easily have lost,” Kerviel told the police. He saw this as a mild admonition, not meant all that seriously.

Beginning in February, 2006, Kerviel made false entries into the computer system totalling as much as a hundred and thirty-five million euros, and his earnings started to rise. He was pleased with the results, which placed him in the top ranks of SocGen’s traders. “It gave a good image of our activity,” he recalled to the court-appointed psychologist. “It made money for the bank. It proved that my models were good, and it repaid the trust that had been placed in me.” An industrious worker, he was spending longer hours at the office, often from 7 A.M. until eight or nine at night.

Kerviel seldom took vacation time—something virtually unheard of in France, where long holidays are considered a God-given right. It also violated the rules of SocGen, which, like most other investment banks, requires employees to take regular vacations in order to detect any ongoing frauds. Kerviel attributed his reluctance to take holidays to the death of his father, from a heart attack, on February 23, 2006, an explanation that his supe-riors accepted. He wore the traditional French mourning attire, a black suit and tie, for a year.

In early 2007, banks in the United States began to notice an alarming rise in default rates among subprime-mortgage borrowers, setting off tremors in the vast mortgage-backed securities market. Still, the Fed seemed confident that the economy would continue to grow. As Kerviel followed the subprime revelations in the financial press, he grew skeptical of such assurances. During the previous years, he had limited his trading mainly to individual stocks. By 2007, he was taking large short positions on the German stock market, the DAX, betting that the subprime crisis would spill over into Europe and drag down the major averages. He created fictitious trades to conceal his gains on SocGen’s balance sheet, but the fake trades did not hide the cash flow. Kerviel had to use SocGen funds to pay for the real contracts, but no money would have changed hands for the fictitious ones.

On a Saturday in late March of 2007, Jérôme Kerviel’s mother called his brother, Olivier, from Pont-l’Abbé. Olivier worked in private wealth management at a small Paris firm. She had just spoken to Jérôme, and said that he sounded perturbed. But he wouldn’t say what was wrong. She asked if Olivier would make sure that Jérôme was all right.

Olivier called Jérôme, and they agreed to meet at a café near Jérôme’s apartment, in Neuilly-sur-Seine. When Olivier arrived, Jérôme was smoking, and he looked as if he hadn’t slept in days. He said that he was suffering from stress. Convinced that global equity markets were likely to suffer from the subprime-debt crisis, he had amassed an eight-hundred-and-fifty-million-euro short position on DAX futures.

Global markets had indeed been shaken in late February but then had rebounded. Kerviel was used to markets moving against him, and prided himself on his cool head. He was so sure of his strategy that he had steadily increased his short position, which toward the end of March had grown to a staggering 5.6 billion euros. He told Olivier that he was not unduly worried. The problem was that he had hidden the position from SocGen’s internal auditors with a variety of false entries into SocGen’s computer data. Com-pliance officers were subjecting him to ever more pointed questions about his daily trading. His answers were evasive or confusing, and he feared that exposure was imminent. Given the potential losses, his career seemed likely to end in a spectacular scandal.

The brothers spent the afternoon and evening discussing Jérôme’s plight, his investment strategy, and the broader subprime crisis and its likely effect on global markets. Olivier advised Jérôme against liquidating the position. He could only attempt to deflect the complicance officers and hope for a mar-ket turn in his favor. In the days that followed, Jérôme and Olivier met frequently to discuss the new developments, often talking until 1 A.M.; they didn’t trust the phones. The inquiries from SocGen’s compliance officers intensified.

That summer, as Kerviel had predicted, the markets began a downturn. In August, BNP Paribas announced that it had temporarily suspended three of its funds, because asset values had become too hard to determine. The DAX, after hitting a record high in July of about 8,100, had fallen to under 7,500 by late August. A month after reaching his low point, Kerviel had made back 2.5 billion euros in losses.

Olivier urged Jérôme not to take any more hidden positions, and Jérôme agreed. Yet within weeks of his sud-den reprieve he was again speculating, both on individual stocks and on a decline in the DAX, and covering these trades with fictitious ones. His intra-day trading was also thriving. As he later told the psychologist, “Almost every day, I declared mind-boggling results.” His colleagues started calling him a “cash machine” and a “star.” Headhunters tried to lure him to rival firms, saying that they had heard of his remarkable results. “Everyone was super-happy, because we were blow-ing right through the ceiling,” Kerviel recalled.

He earned forty-three million euros for the bank in 2007, which accounted for an extraordinary fifty-nine per cent of earnings for Delta One’s listed-products desk and twenty-seven per cent of earnings for all of Delta One. He reportedly asked for a bonus of six hundred thousand euros but received half that amount.

Kerviel says he assumed that his activities had the tacit approval of bank officials. After all, there had been, by his count, a total of ninety-three alertes, or official notices, generated by his trading, and several of them, including those which appeared in the spring, when the hidden trading was getting under way in earnest, noted that counterparties were pending and that numerous trades appeared to be suspicious. “I thought it was incredible that no one came to talk to me about this,” he said to the psychologist. “My positions made money, so, in a way, I told myself that . . . it legitimatized what I was doing.” At the same time, Kerviel went to great lengths to continue his deception, enlisting a trading assistant to help enter the fictitious trades and on several occasions forging e-mails to appease the compliance officers.

On December 31, 2007, when many of his colleagues were off for New Year’s, Kerviel was at the trading desk. In closing out his positions, Kerviel says, he realized a gain of nearly 1.5 billion euros, or $2.2 billion. To conceal the year’s gains, he had created eight fictitious money-losing forward contracts. (A forward contract is a private agreement to deliver an asset at a fixed price at a future date.) If the stock market continued to decline, the positions would lose, thereby balancing the short positions.

On January 2, 2008, new risk guidelines went into effect in Europe as a result of the Basel II accord, an agreement reached by inter-national banking authorities and intended to improve risk management. Many banks were now required to maintain higher levels of capital to offset investment risks like Kerviel’s forward contracts.

Compliance officials questioned Kerviel about the eight forward transactions, whose size, according to the book “Le Joueur,” caused suspicion. Kerviel had entered the name of Baader Bank, a German brokerage, as a counterparty. When asked for an explanation, Kerviel replied, “This materialized the give up of puts made late; I owe money to the counterparty. We’ll rebook it a.s.a.p.” According to SocGen’s internal report, the risk-control officer later admitted that he did not understand this explanation. On January 9th, Kerviel annulled the contracts and was told that the problem had been resolved.

Despite this flurry of regulatory activity, during the first half of January Kerviel amassed a large long position on futures, betting this time on a market recovery. By mid-January, his exposure approached fifty billion euros. Others were also optimistic, and many economists predicted that the U.S. would not fall into recession. But on January 4th, following an unexpectedly bleak employment report, the Dow Jones Industrial Average dropped more than two hundred and fifty points, and continued to plunge during the following weeks. The first five trading days of 2008 in the U.S. turned out to be the worst start of a calendar year ever. In Europe, recession fears hit major stock indexes hard. The DAX, which had opened the new year at 8,000, dropped three weeks later to below 6,500, representing a stunning nineteen-per-cent decline. The more the market dropped, the more Kerviel lost.

Meanwhile, the problem of the eight fictitious forwards used to conceal his 2007 profits had not been resolved by the explanation that he had simply annulled them. Compliance officers, scrutinizing the data more closely, called for a meeting with Kerviel.

Kerviel said that he’d made a mistake; the contracts had been entered, but the counterparty was Deutsche Bank, not Baader. The meeting adjourned, but none of the compliance officials found Kerviel’s explanations persuasive. They asked him for documentation.The next day, Friday, January 18th, Kerviel forwarded to the officials two forged e-mails with the subject heading “Trade Details.”

Le Nouvel Observateur later published text messages sent that afternoon from Kerviel to Moussa Bakir, a friend and the broker through whom he executed some of his orders, saying that he thought he would be fired within the hour. Kerviel was planning to spend the weekend with another friend at a Normandy resort, to celebrate his thirty-first birthday. To his surprise, he was told that the regulatory matter had been resolved and that he could leave.

The next morning, Deutsche Bank reported that there was no record of the eight forward contracts between the bank and SocGen. Soon after Kerviel arrived at the hotel, he began receiving calls from his superiors at the bank, ordering him back to headquarters. He left without unpacking and returned by train to Paris, where Olivier met him at the Gare Saint-Lazare.

The phone calls from the bank persisted, and Kerviel replied to one, in a text message, “I don’t know if I’m going to come back or throw myself under a train.” How serious was he? When he sent the message, he was just outside the bank headquarters, far from a railroad track. But bank officials were alarmed that he might be suicidal, and not without reason: the previous summer, a SocGen trader had jumped off a bridge, reportedly after unauthorized trading losses were uncovered. So when Kerviel called to say that he was in the lobby, the bank dispatched a physician to evaluate his mental state. After concluding that he was stable, the doctor took him to a conference center on the sixth floor.

In addition to his immediate superiors, several high-level officials, none of whom Kerviel had met before, were present. Among them was Jean-Pierre Mustier. Known as Bouton’s “dauphin,” Mustier was a mathematics whiz who had graduated from the École Polytechnique and the École des Mines. He had helped establish the SocGen investment bank as a leader in equity derivatives.

Officials asked Kerviel first to simply explain what he had been doing. Still worried about his mental state, they apparently wanted both to reassure him and to get to the bottom of the mystery. He seemed evasive, and spoke of an “algorithm” he had discovered that, he insisted, had generated amazing gains: 1.5 billion euros in 2007. Confronted with the false forwards, he said that they were necessary to conceal the vast profits.

About two hours into the questioning, Kerviel asked to use the bathroom. Mustier, still worried that Kerviel might do something drastic—that he might even be armed—said that he’d accompany him. Trying again to bolster Kerviel’s morale, he told him that the bank couldn’t keep him on its payroll, but that it was counting on him to help sort through the trades. Mustier complimented Kerviel on his trading prowess. He said that he’d met many traders who had claimed to find a foolproof trading algorithm, but none had proved effective. Mustier told him, “If what you say is true, then you’re the best trader I’ve ever met.”

The interrogation resumed in the conference room, and Kerviel reluctantly described the mechanics of the trading that led to his huge gains. Later in the meeting, Kerviel was asked whether he had made additional bets on the market since his 1.5-billion-euro gain at the end of the year. “Just a small long position,” he replied.

That weekend, Daniel Bouton, the bank’s chairman and C.E.O., was at SocGen’s headquarters preparing for an emergency board meeting scheduled for Sunday afternoon. Though SocGen was not as deeply affected by the meltdown in the American mortgage market as many of its rivals, the purpose of the meeting was to brief directors on an anticipated loss of two billion euros, which would be announced the following week. Similar losses at other banks were causing a global scramble among banks to raise additional capital. Meanwhile, lenders were so fearful of the creditworthiness of even the largest banks that they were increasingly unwilling to extend credit, even on short-term overnight loans. It threatened to be the worst liquidity crisis since the Second World War.

Bouton was discussing this situation with a few other bank officers just before lunch on Saturday. Suddenly, Jean-Pierre Mustier burst into the room and said that the bank had discovered an “undisclosed trading position.” Mustier said that all the evi-dence pointed to a young trader named Jérôme Kerviel.

That night, a team of auditors and bankers began examining all of Kerviel’s trading records from the prior year, trying to confirm the claim that he had made profits of 1.5 billion euros, and to locate any open positions. They couldn’t invalidate the gain, but they felt that the trades weren’t nearly as small or infrequent as Kerviel had maintained. By Sunday morning, they still hadn’t made much headway in finding hidden open positions.

Kerviel returned to the bank at about ten o’clock that morning. This time, Luc François, a SocGen official, met with him alone. Unknown to Kerviel, a speakerphone broadcast the proceedings to a team of auditors and other bank officials. According to someone familiar with the exchange, François pointed to a pile of papers and told Kerviel they proved that most of what he had said the previous day was a lie. “I want you to tell the truth and nothing else,” he said.

“O.K.,” Kerviel replied. Then he said, “Everything I made last year I have lost.” Only when François pressed him did he begin to identify specific positions. As he did, the auditors worked to pinpoint and assess the bank’s exposure. Within an hour, they reported to François, on his BlackBerry, that the open positions amounted to fifty billion euros. François was stunned. He asked Kerviel for the aggregate of his open positions. Kerviel insisted that they couldn’t be more than twenty-five or thirty billion euros—still an astronomical sum. François didn’t tell him what the bank knew. He was worried that Kerviel was unstable or might commit suicide. After the meeting with François, officials told Kerviel not to return to work, to stay at home, and not to speak to anyone of these matters.

Mustier delivered the news to Bouton. The magnitude of the problem was almost unimaginable, and there was a serious risk that the bank could fail. Société Générale faced a loss of 1.5 billion euros and still had the unhedged fifty-billion-euro exposure in the futures market. The disclosure of this position might be enough to cause a run on the bank, triggering an international financial panic and stock-market crash.

SocGen officials decided that the position had to be liquidated as soon as possible, despite the falling markets. It would be reckless and indefensible to speculate further by holding on and hoping for a market recovery, and the bank was not in the business of bet-ting on moves in markets. The selling had to be done in secrecy. Meanwhile, there was a risk that Kerviel might tell other traders, who would be in a position to make a fortune by short-selling SocGen stock, and even stock indexes.

Bouton called Gérard Rameix, the secretary general of the Autorité des Marchés Financiers, and told him that the bank would invoke a provision of French securities law which allows a publicly traded company to withhold information if such a disclosure would threaten the company’s viability. Still, the bank would have to be prepared to make a statement in the event of a leak. In addition, he called Christian Noyer, the governor of the Banque de France, which has the primary responsibility for liquidity issues involving French banks. If word got out, SocGen might face a liquidity crisis.

That afternoon, the bank’s top equity-derivatives trader was summoned. Mustier told him only that an enormous futures position had to be sold as soon as possible, without roiling markets. The SocGen trader was able to eliminate the entire position in three days. Nevertheless, SocGen’s loss on the position more than tripled.

It’s difficult to quantify how much of that loss was caused by SocGen’s own trading. According to the bank, its trading while liquidating Kerviel’s positions never exceeded about eight per cent of total trading volume on the Euro Stoxx, DAX, and FTSE exchanges, but even this relatively small addition could have had a significant impact on prices. SocGen hasn’t disclosed how many of Kerviel’s futures contracts were sold and how many were hedged with equivalent short positions. In any event, the unrelenting selling pressure from SocGen likely contributed to the global sell-off and the mounting sense of panic.

On that same Monday afternoon, January 21st, after European and Asian markets had closed with major declines, the U.S. Federal Reserve hastily convened its emergency meeting. The Fed made no mention of SocGen, but said that in reaching its decision on the rate cut it had considered the “strains in some financial markets,” and hoped that forceful action would ease concerns about “deteriorating conditions in financial markets.”

A Federal Reserve spokeswoman said recently that the bank hadn’t been contacted by French authorities and that no one at the time was aware of SocGen’s predicament. Even considering the need for secrecy, this seems an extraordinary lapse in communication, given the interconnected global markets. Still, the Fed’s interest-rate cut signalled that the Fed was prepared to act decisively. Stocks showed some signs of recovery on Tuesday and Wednesday. By the end of Tuesday, Bouton could take comfort in the realization that the size of the loss was unlikely to exceed ten billion euros.

By Wednesday, SocGen was able to determine that it needed to come up with 5.5 billion euros, which it would raise in a rights issue. That day, Morgan Stanley and J. P. Morgan confirmed that they would underwrite the issue. Kerviel’s position had been unwound by the close of trading: the gross amount of the loss was 6.4 billion euros, apparently the largest single trading loss in banking history. That evening, Bouton offered to resign, but the board rejected the idea. As one bank officer put it, “When the ship is sinking, you don’t replace the captain.”

The next day, SocGen issued a press release and Bouton sent a message to all SocGen employees. Trading in SocGen shares was halted temporarily; in all, the shares fell by about four per cent. It could have been much worse—a loss of fifteen to twenty-five per cent could have set off an international panic.

On Wednesday, January 23rd, Kerviel received a text message from the SocGen doctor: “Mettez-vous au vert” (“Spend some time in the country”). She warned him that there would be an announcement soon and urged him to get out of Paris. Kerviel left his apartment and moved in with his brother. He called SocGen so that he and the bank could remain in touch. Olivier insisted that he contact a lawyer he knew named Élisabeth Meyer, and Kerviel sent her an e-mail with a brief summary of his predicament.

Kerviel was baffled by statements in the press that had come, apparently, from sources at Société Générale. He hadn’t fled; he had taken refuge at Olivier’s apartment, on the Rue de Rome, because the press had his apartment building under constant surveillance. He had been on the phone every day with the bank physician who was monitoring his mental health. He wasn’t suicidal and had never been mentally unstable. And he certainly wasn’t a terrorist. The Koran found in his apartment belonged to his girlfriend at the time, who was a Muslim.

A week after being summoned home from Normandy, Kerviel began two days of interviews with the police. “I admit that I fabricated operations, I admit that I cancelled fictitious operations,” he told his interrogators. “I admit having taken large positions that could be qualified . . . as outside the limits of my mandate, and which I masked by a fictitious transaction. I had several motivations in making those orders, but first and foremost I had in mind to make money for the bank.”

At the same time, Kerviel pointed out the ways in which the hierarchy either knew or should have known about the scope of his trading—the numerous alertes, the e-mails from compliance officials, the elevated trading volume and cash flows on SocGen’s accounts, the fact that he took virtually no vacation days.

“Why wasn’t there any response, any reaction to that?” an interrogator asked.

“Because I generated cash,” Kerviel replied. He later added, “I told myself that Société Générale would never fire someone who was generating this much cash.”

The fact that his superiors might have been aware of his trading activity, ignored it, or even tacitly encouraged it, along with the fact that he had violated no individual trading limits, seemed to complicate his case. A two-judge panel began investigating Ker-viel on three criminal counts: breach of trust, forgery and use of forged documents, and unauthorized entry of data into a computer system. Each offense carries a maximum prison term of three to five years.

Two weeks later, on February 8th, an appeals court agreed with the prosecutor that Kerviel posed a possible risk of conspiring with others, and of compromising the investigation—standards that in France justify imprisonment before indictment. (There is no direct equivalent of habeas corpus in France.) When Kerviel and his lawyer, Meyer, arrived at the Palais de Justice for a hearing that after-noon, they were greeted by dozens of journalists, photographers, television crews, and curious onlookers. Kerviel, who was wearing a gray suit and a dark tie, waved to the crowd. At the hearing, he was informed that he would be taken to jail immediately, and he turned, incredulous, to Meyer. Four hours later, Meyer emerged to address the crowd. “I come out alone,” she said, and subsequently burst into tears.

Kerviel was taken to La Santé—the nineteenth-century prison outside which the condemned were once publicly executed by guillotine—and placed alone in a cell in the so-called V.I.P. wing, which has housed, among others, Alfred Sirven (a head of the oil giant Elf, convicted in a corruption scandal), Maurice Papon (the former Vichy official convicted of crimes against humanity), and Jean-Christophe Mitterrand (the former President’s son, on trial for illegal arms sales). Kerviel had brought no clothes, or toiletries. He was isolated from other prisoners and kept on a suicide watch. His only contact was with police officers and the psychologist assigned to assess his mental state.

Olivier had been trying to prepare their mother for bad news, but he hadn’t been specific, and she was shocked by the media onslaught. The next day, Olivier gathered some clothing and other necessities, and took them to the prison. As the weeks passed, Kerviel found himself trying to figure out how things had deteriorated so suddenly. Why had SocGen unwound his positions so precipitately—especially on a holiday when American markets were closed?

Société Générale appointed a special committee of directors to investigate the Kerviel affair, and they, in turn, hired a team of lawyers and accountants. The committee released a sixty-nine-page report on May 20th. It concluded that Kerviel had essentially acted alone, although with the knowledge and help of a junior trading assistant. Furthermore, there was no evidence of any similar fraud within SocGen’s investment bank.

However, the report included a catalogue of supervisory failures that reflected the lax regulatory climate, at least as it existed in the Delta One trading operations. The committee noted that Kerviel’s superiors knew of intra-day trading outside his normal purview, which was trading in turbo warrants. His immediate superior, unnamed in the report but known to be a financial engineer named Éric Cor-delle, didn’t regularly consult the database containing individual traders’ transactions, which would have revealed abnormalities in Kerviel’s accounts. Cordelle, in turn, was given scant guidance for managing a trading desk; his priorities were undefined and his supervisory techniques were never examined by his superior.

On April 17th, the bank announced that Bouton would relinquish the title of chief executive but remain as chairman. Éric Cordelle was fired on May 23rd, and, in an interview with Le Figaro on June 4th, conceded that he was unqualified to supervise a trading desk. “The role of a financial engineer is to invent structured products and put them to work,” he said. “I am not a trader.” He noted that during this period the Delta One desk was “exploding” in terms of volumes of transactions, and added, “Why did Jérôme do this? I don’t know. And why, on Friday, January 18th, when he was already caught but not everything was discovered, did he frantically continue to buy futures? I think I will never have the answer.”

Bouton does not speak publicly about the affair, but he seems unable to contain his fury toward Kerviel, whose name he can barely bring himself to speak. To Bouton, it is especially galling that Kerviel has aroused such sympathy among the French public, a sentiment that might be attributed to an innate French hostility toward financial institutions and their highly paid executives and traders. As one official put it, “This wouldn’t have been a surprise in New York or London. But in France it opened a window on the world of trading. How do they get such lavish bonuses? To many, this was the scandal.”

Among the large team of lawyers SocGen hired to defend its interests in the affair, Jean Veil has been the most visible, dispatched to convey the bank’s case to a skeptical public. Veil is one of France’s best-known lawyers; he also represents former President Jacques Chirac, and his mother is the celebrated politician and women’s-rights advocate Simone Veil. He has pressed the case that Kerviel is a liar, someone with defective moral character and an undistinguished education, who simmered with resentment over his comparatively small bonuses and failure to advance more rapidly. Still, Veil has acknowledged that his only interaction with Kerveil has been in court appearances.

Like many in the executive ranks, Bouton is said to be mystified by Kerviel’s motives, since he realized little, if any, personal gain. It makes no sense that he would engage in such an elaborate, high-risk scheme simply to enhance his relatively modest bonus, or to bolster his reputation. After the terrorist attacks of September 11, 2001, SocGen had made detailed plans to thwart a terrorist attack on its trading floors. One official says, “We never thought about a single guy who could put so much money at risk.”

The court-appointed psychologist, Jean-Pierre Bouchard, examined Kerviel at La Santé over three days in March, spending more than twelve hours with him. The report he prepared for the judges concluded that Kerviel had his “highest capacity in abstract and verbal intelligence . . . a good capacity for integrating and making use of general and social knowledge . . . satisfactory skills of attention, reasoning and analysis.”

In short, there was nothing aberrational about Kerviel that might account for his behavior. But the combination of the financial and personal success derived from his hidden trading, plus the lax supervision by his superiors, which he took as legitimatization, “might have had a strong effect in the reinforcement of these patterns.”

Kerviel’s trading thesis—that eq-uity markets would recover—was at least partly borne out. The DAX, after falling to below 6,500 when SocGen finished unwinding its position, had risen to 7,000 by early February. It dropped to a new low in March, before recovering again in April and May. Of course, there’s no way to know what Kerviel would have done had he continued to trade during that period, and the bank, for its part, could not carry a fifty-billion-euro exposure and retain any confidence in its future once the position was discovered and disclosed. In the longer term, Kerviel’s thesis was wildly off base. Markets resumed their slide this summer. Bank stocks were being dumped in near-panic selling, as credit and liquidity fears mounted. The price of Société Générale’s shares on the Paris exchange hovered near ninety euros in early January. By early October, the tremors in the U.S. subprime mortgage market had grown into the worst banking crisis since the Great Depression. The U.S. had approved a seven-hundred-billion-dollar rescue operation, Britain announced that it would inject capital into its banking system, and Ireland and Germany moved to guarantee deposits in a continuing effort to stave off a banking panic. At the end of last week, SocGen shares closed at fifty euros.

Kerviel was released on March 18th, after spending five weeks at La Santé. Wearing a dark-gray suit, a pink shirt, and no tie, he smiled and waved to a crowd of waiting photographers, but he maintained a public silence out of deference to the judges and the ongoing investigation. Since his release, he has been preparing his defense and working for JeanRaymond Lemaire, a computer expert who has an I.T. consulting business. Olivier is spending most of his time on the defense as well. After news of his brother’s arrest, Olivier left his job. His boss told him, “Under the circumstances, I’m sure you understand we can’t have someone with the name Kerviel working here.”

This fall, the two-judge panel is expected to decide what, if any, in-dictments will follow. In July, Kerviel replaced Élisabeth Meyer and her legal team with a larger one co-led by Éric Dupond-Moretti, a high-profile criminal-defense lawyer. It is likely that Kerviel will be indicted, and will have to serve at least some additional prison time, if only as a deterrent to others in the international banking system.

However improbable it seems, Kerviel hopes to become a trader again. He would like to move to America and work on Wall Street, where he thinks he would be judged on his skills, not on his lack of a grande école pedigree.

“I accept my share of responsibil-ity, which I don’t deny,” Kerviel told the psychologist. “But it must be acknowledged that I was not alone in this thing, that my superiors were indulgent toward my activities, and that the responsibility is not mine alone.” He also noted, “When you’re used to making five hundred thousand euros every day, at some point it becomes normal. The results, the numbers, become banal. You’re happy, but it makes less of an effect on you. It’s not an ego thing. There are people in the company who are far more brilliant than I am. I was one of the most discreet about results. Truly, my goal was just to increase activity.” ♦

Sign up to get the best of The New Yorker delivered to your inbox every day